1. QUESTION
As a student of entrepreneurship, critically illustrate and explain the different types of
business.
2. Introduction
The term business refers to an organization or enterprising entity engaged in
commercial, industrial, or professional activities. The purpose of a business is to organize
some sort of economic production (of goods or services). Businesses can be for-profit
entities or non-profit organizations fulfilling a charitable mission or furthering a social
cause. Businesses range in scale and scope from sole proprietorships to large,
international corporations. Business also refers to the efforts and activities undertaken
by individuals to produce and sell goods and services for profit.
Business Types
There are different types of businesses to choose from when forming a company, each
with its own legal structure and rules. Typically, there are four main types of
businesses: Sole Proprietorships, Partnerships, Limited Liability Companies (LLC),
and Corporations. Before creating a business, entrepreneurs should carefully consider
which type of business structure is best suited to their enterprise.
This article will provide a quick overview of these four basic types of businesses to help
entrepreneurs make one of their most important decisions. There are many ways to
organize a business, and there are various legal and taxation structures that correspond
with these. Among others, businesses are commonly classified and generally structured
as:
Sole proprietorships: As the name suggests, a sole proprietorship is owned and
operated by a single person. There is no legal separation between the business and the
owner, which means the tax and legal liabilities of the business are the responsibility of
the owner.
3. Partnerships: A partnership is a business relationship between two or more people who
together conduct business. Each partner contributes resources and money to the
business and shares in the profits and losses of the business. The shared profits and
losses are recorded on each partner's tax return.
Corporations: A corporation is a business in which a group of people acts as a single
entity. Owners are commonly referred to as shareholders who exchange consideration
for the corporation's common stock. Incorporating a business releases owners of the
financial liability of business obligations. A corporation comes with unfavorable taxation
rules for the owners of the business.
Limited liability companies (LLCs): This is a relatively new business structure and was
first available in Wyoming in 1977 and in other states in the 1990s. A limited liability
company combines the pass-through taxation benefits of a partnership with the limited
liability benefits of a corporation.
Series LLC
Currently available in 18 states and counting, series LLCs are an up-and-coming type
of business ownership structure. Basically, they allow one parent LLC to form multiple
internal LLCs in subsidiary fashion. These nested LLCs can be used to isolate liability
for different business units.
Series LLCs are complex, but worth discussing with your advisors if your business has
distinct units that might benefit from individual treatment.
C Corporation
A C corporation is owned by shareholders who may have varying levels of control and
involvement in the everyday operations of the business. In the case of stock
corporations, ownership is issued in shares of stock.
4. A corporation is formed by filing articles of incorporation with the state. The process
of incorporation includes appointing a board of directors to oversee the business and
establishing bylaws for its governance.
With governance managed through a board of directors and ownership distributed
among shareholders, corporations represent a further degree of separation between
the business entity and its owners.
By default, corporations are C corporations, so called because they are taxed under
Subchapter C of the Internal Revenue Code (IRC). Unlike sole proprietorships,
partnerships, and LLCs, C corporations are not pass-through entities.
Profits belong to the corporation and are subject to corporate income tax. They may
also be distributed through dividends to shareholders.
S Corporation
Some corporations can enjoy the benefits of pass-through taxation by electing to be
taxed as an S corporation. To qualify, the corporation may not have more than 100
shareholders and may issue only one class of stock.
Only individuals, certain estates and trusts, and certain tax-exempt organizations may
own shares in an S corporation.
An S corporation is formed through the same steps as a C corporation, with an
additional election made through a filing with the Internal Revenue Service.
Nonprofit Corporation
Most nonprofits are formed as corporations that apply for tax-exempt status under
Section 501(c) of the IRC. Their entity formation process is the same as that of other
corporations, with articles of incorporation filed with the secretary of state, a board
of directors, and bylaws for governance.
5. Nonprofits may be formed solely for the tax-exempt purposes specified in Section
501(c), however, and they are subject to specific regulatory requirements in each state.
Contrary to popular belief, nonprofits can and should generate profits. The difference
between a nonprofit entity and a for-profit entity is how those profits are invested.
Rather than being distributed to shareholders, profits are reinvested in the nonprofit’s
operations to serve its charitable mission.
Benefit corporation
Benefit corporations are corporations formed to serve a public benefit in addition to
the usual corporate mission of earning profits. They are structured like other
corporations with a board of directors and bylaws, yet the board is responsible for
measuring and reporting on its social impact as well its financial performance.
Benefit corporations are an increasingly popular structure for entrepreneurs who want
to do good while doing business.
Low-Profit Limited Liability Company (L3C)
L3C is a relatively rare business type that combines the legal structure of an LLC with
the charitable mission of a nonprofit. An L3C can distribute modest profits to its
members, yet this must always be secondary to the primary purpose of furthering a
charitable mission.
L3Cs may not be formed for political or legislative purposes. L3Cs were conceived as
an investment vehicle for foundations, which must give 5% of their assets to a
charitable program or program-related investment (PRI) each year. That plan ran into
some hurdles with the IRS, however, and the L3C structure has not been widely
adopted as a result.
6. References
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Baassiri, Raméz (2018). Interrupted Entrepreneurship: Embracing Change In The
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Bowman, Erik (2011). Entrepreneur Training Manual, Third Edition: Certified
Entrepreneur Workbook. Guanzi Institute Press. ISBN 978-0983786290.
Bruder, Jessica (September 2013). "The Psychological Price of Entrepreneurship." Inc.
(Winner 2014 Annual Awards Contest of the Deadline Club)
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